Global Market Review: From AI-Fueled Peaks to a Trade War Precipice

A Week of Two Halves – From Record Highs to a Trade War Shock

The week ending October 10, 2025, will be remembered as a period of extreme sentiment reversal. The first four trading days were characterised by a powerful, AI-fueled rally that pushed several major US indices, including the S&P 500 and Nasdaq, to new all-time highs.¹ This optimism was underpinned by persistent expectations of further Federal Reserve rate cuts and a general willingness by investors to look past the ongoing US government shutdown, which had entered its tenth day.³

However, this bullish sentiment was shattered on Friday, October 10, by the sudden and sharp re-escalation of the US-China trade war. Threats of “massive” new US tariffs and swift, strategic Chinese retaliation triggered a widespread global sell-off, erasing the week’s gains for most Western indices and ushering in a new period of profound market uncertainty.⁶ While US and European markets ended the week with significant losses, Asian markets presented a more complex picture. India’s stock market emerged as a resilient outlier, posting strong weekly gains on the back of supportive domestic factors.⁹ Meanwhile, mainland Chinese markets rallied after a week-long holiday, partly in defiance of US pressure, while Hong Kong’s internationally-exposed market slumped.¹¹ The week was ultimately defined by the collision of three powerful forces: the persistent optimism around AI technology, the economic uncertainty created by the US government shutdown, and the overriding geopolitical risk of the US-China trade conflict.

Note: Weekly change for Nasdaq Composite is based on a reported percentage; closing level is an estimate. STOXX 600 data was insufficient for a final weekly figure, but the index reversed early gains to finish lower. Shanghai Composite was closed for holiday until Oct 9.

The Global Chessboard: Key Macroeconomic Drivers of the Week

Investor sentiment and market volatility during the week were shaped by three dominant global narratives, which ultimately converged on Friday to produce a dramatic market downturn.

The Trade War’s Return: “Trade War 2.0” Ignites Market Fears

The defining event of the week was the abrupt end to a months-long calm in US-China relations. On Friday, October 10, US President Donald Trump utilised his Truth Social platform to threaten “massive” new tariffs on Chinese imports, citing what he termed “very hostile” actions by Beijing related to critical mineral exports.⁶ The announcement shattered market confidence, signalling a dramatic escalation and prompting analysts to label the event the start of “Trade War 2.0”.⁶ Adding to the tension, Trump cast doubt on a previously planned meeting with Chinese President Xi Jinping, suggesting a deepening diplomatic impasse.⁸

China’s response was notably swift and strategic, moving beyond simple tit-for-tat tariffs to a more sophisticated form of economic pressure. This shift from symmetric retaliation to a targeted assault on supply chains was a key factor in the market’s severe reaction. Beijing’s measures included implementing new export controls on rare earth elements and associated technologies, which are vital inputs for the US technology and defence industries.⁶ Further actions included imposing new port fees on US-owned vessels, initiating an antitrust investigation into US chipmaker Qualcomm, and reportedly halting purchases of US soybeans.⁵ This strategy appears designed to inflict maximum, targeted pain on the US’s most advanced industries rather than simply raising costs for consumers. The market impact was a classic flight to safety, with investors aggressively selling equities and rotating into assets like Treasuries and gold.⁸ Technology and semiconductor stocks were hit particularly hard due to their direct exposure to this supply chain conflict.⁶

Navigating in the Dark: The US Government Shutdown’s Economic Fog

Compounding the geopolitical shock was a growing unease over the ongoing US government shutdown, which entered its 10th day.³ The primary market impact of the shutdown has been the creation of an information vacuum. The closure of government agencies has led to the delay of crucial economic data releases, including the September nonfarm payrolls report and the highly anticipated October Consumer Price Index (CPI) report.³

This “data outage” leaves the Federal Reserve and investors “flying blind” as they attempt to navigate a complex economic environment.³ With futures markets pricing in a 95% probability of a rate cut at the late October Fed meeting, the lack of official inflation and employment data severely complicates the central bank’s decision-making process.⁵ The absence of hard data may force the Fed to hold rates steady for longer than the market anticipates, posing a risk to the rally.⁵ In this environment, markets have become heavily reliant on private-sector indicators, such as the ADP private payrolls report—which unexpectedly showed a job loss of 32,000—and the University of Michigan Consumer Sentiment survey, which remained near historic lows.⁴ This reliance on alternative, and sometimes conflicting, data points increases the potential for market misinterpretation and heightens the importance of forward-looking guidance from corporate earnings reports.⁵ The shutdown created the perfect conditions for a market overreaction to Friday’s trade news; with no fresh, positive economic data to provide a counterbalance, the geopolitical shock was amplified in a vacuum of official information.

AI: From Market Engine to Market Risk

The theme of Artificial Intelligence acted as a double-edged sword during the week, fueling both the initial rally and the subsequent crash. The first half of the week saw a powerful continuation of the “AI-driven euphoria” that has characterised much of 2025.⁵ This optimism, centred on semiconductor giants like Nvidia, propelled the Nasdaq and other tech-heavy indices to new record highs in what was described as an “everything rally” that lifted multiple asset classes.²

By Friday, however, the narrative had soured dramatically. The trade war shock, which directly targets the semiconductor supply chain at the heart of the AI revolution, combined with growing internal market concerns about a potential “AI bubble” and overstretched valuations, caused a violent reversal in technology stocks.⁶ The very concentration of the rally in a narrow group of AI-related companies made the broader market highly dependent on their performance. When the geopolitical news struck this central pillar of market sentiment, the resulting sell-off was exacerbated as fears of an AI bubble compounded the trade fears, leading to a rapid and painful correction. Companies like AMD and Nvidia, which had been darlings of the rally, saw sharp declines.⁶ Despite the weekly volatility, it is worth noting that the technology sector remains the year’s top performer by a significant margin, with the S&P 500 Information Technology sector still up 25.3% year-to-date through Thursday.¹⁵

North American Markets: Bull Run Interrupted

After reaching new all-time highs mid-week, US indices suffered their worst weekly losses in months following Friday’s dramatic trade-war-induced sell-off.¹ While investors had largely shrugged off the government shutdown for over a week, they reacted instantly and decisively to the renewed trade threat, revealing that markets view geopolitical supply chain risk as a far greater threat to corporate earnings than a temporary disruption in US government services.

The S&P 500 closed at 6,552.51, down 2.43% for the week, its largest one-week percentage decline since May 2025.¹⁶ The Dow Jones Industrial Average finished down 2.7% for the week at 45,241, while the tech-heavy Nasdaq Composite fell 2.5%.¹⁷ The primary driver was the sharp reversal on October 10, when the S&P 500 fell 2.7%, the Dow dropped 1.9%, and the Nasdaq plunged 3.6%.¹⁷ For the S&P 500, it was the largest single-day percentage decline since April 2025.¹⁶

The technology and semiconductor sector was the epicentre of the sell-off. The Philadelphia SE Semiconductor index plunged 3.7% on Friday alone.⁸ Key AI-related stocks that had led the market higher were among the biggest losers, including AMD (-7%), Nvidia (-2%), and Tesla (-2%).⁶ The dramatic divergence between these falling semiconductor stocks and soaring rare earth stocks on the same day served as a real-time geopolitical barometer. In a clear counter-trend, stocks related to rare earth minerals surged on the news of China’s export restrictions, as the market priced in the specific weapons of this new phase of the trade war. MP Materials jumped 11% and USA Rare Earth gained 15%.⁶

Underlying economic sentiment remained fragile. The University of Michigan’s preliminary October report showed consumer sentiment remained near historic lows at 55.0, reflecting persistent worries about inflation and job security.⁶ Earlier in the week, falling Treasury yields and crude oil prices had provided some support for equities.⁵ The 10-year Treasury yield fell below 4.10%, while WTI crude oil dropped to near $60 per barrel following news of a ceasefire in Gaza, which reduced the geopolitical risk premium on oil.⁵

European Markets: Buffeted by Global Headwinds

European indices were on track for a positive week before being dragged down decisively by Friday’s global sell-off, ultimately ending in negative territory. The week’s trading action highlighted the “double jeopardy” faced by European markets, which are simultaneously exposed to external global shocks and internal domestic weaknesses.

The pan-European STOXX 600 was heading for a third consecutive weekly gain early on Friday before the reversal took hold.¹⁹ Germany’s DAX index closed at 24,241.46, finishing the week with a 0.6% loss after falling 1.5% on Friday alone.²⁰ In the UK, the FTSE 100 closed at 9,427.47, down 0.7% for the week.²⁰

Beyond the global trade tensions, European markets contended with several regional headwinds. Lingering political instability in France, where President Macron was expected to name a new prime minister, weighed on the euro and regional sentiment.¹⁴ This was compounded by weak economic data from Germany, the Eurozone’s largest economy, which added to the cautious mood.¹⁴ Meanwhile, minutes from the European Central Bank indicated its rate-cutting cycle may be over, though the door remains open for further action, creating a state of policy ambiguity for investors.¹¹

A notable company-specific event highlighted a key secular trend for investors. Shares of iconic automaker Ferrari plummeted by 13-15% on October 9 following its Capital Markets Day.²⁴ The plunge was triggered by the company’s announcement of a significantly scaled-back electrification strategy, with a new goal of 20% EV sales by 2030, down from a previous target of 40%. This, along with financial forecasts that disappointed investors, led to a severe market punishment. The episode underscored that for the modern investor, a credible and aggressive forward-looking strategy, especially on ESG-related themes like electrification, can be more important than strong current performance, even for the most powerful legacy brands.²⁴

Asian Markets: A Region of Contrasts

The week’s performance starkly illustrated the fragmentation of Asia as a singular investment thesis, with major markets diverging sharply based on their unique economic structures and geopolitical positions.

Mainland China & Hong Kong: A Tale of Two Markets

Reopening after the week-long Golden Week holiday, mainland Chinese markets surged. The Shanghai Composite climbed 1.32% on Thursday to a decade high, though it slipped nearly 1% on Friday to close at 3,897.03.¹¹ The initial rally was driven by strength in mining stocks, buoyed by Beijing’s new rare earth export controls, and by technology stocks catching up to the global AI momentum from earlier in the week.¹¹ The market’s strong performance in the face of US threats can be interpreted as a signal of state-backed confidence and defiance.

In stark contrast, Hong Kong’s internationally-focused Hang Seng index had a difficult week, falling for four consecutive sessions at one point and ending the week down 3.42%.¹¹ The index was weighed down by its exposure to the global trade war and a major corporate deal: HSBC’s proposed $13.6 billion buyout of Hang Seng Bank caused HSBC shares to plunge 5.5% while Hang Seng Bank’s shares soared 26%, creating significant volatility in the heavyweight financials sector.¹¹

Japan: Political Tremors Rattle a Strong Week

The Japanese market had a very strong week overall, with the Nikkei 225 closing up approximately 5.07%.¹⁹ The index hit record highs mid-week, driven by the global AI enthusiasm and strong earnings from corporate giants like Fast Retailing, which reported record profits.²⁹ However, the market pulled back 1% on Friday to close at 48,088.80.¹⁹ This late-week decline was attributed to emerging domestic headwinds. Political uncertainty rose after the Komeito party announced it would leave the ruling LDP coalition, complicating the political future of new leader Sanae Takaichi.²⁵ Separately, higher-than-expected producer price data for September raised concerns about inflation.¹¹

India: A Resilient Outlier

Indian markets bucked the global trend of negativity, posting their second consecutive week of strong gains. The BSE Sensex rose 1.6% for the week, closing at 82,500.82, while the Nifty 50 closed near 25,285.⁹ India’s outperformance, driven by its large and domestically-oriented economy, was supported by a confluence of positive local factors. The Reserve Bank of India’s recent dovish stance, keeping its repo rate steady at 5.5%, has fostered a positive environment for credit growth.³² Furthermore, as a major net importer of crude oil, India’s economy and market sentiment benefit significantly from the recent decline in Brent crude prices.³² The gains were broad-based, with buying seen across multiple sectors including banking, realty, pharma, and auto stocks.³¹

Oceania Markets: Central Banks and Commodities in Focus

Markets in Australia and New Zealand ended the week with modest losses, their performance dictated by the interplay of global commodity prices, domestic monetary policy, and the overwhelming influence of international risk sentiment.

Australia: A Slave to Commodity Swings

The Australian S&P/ASX 200 index finished the week with a loss of 0.3%, closing at 8,958.³⁴ The index’s performance served as a proxy for the week’s entire global narrative: a mid-week rally followed by a sharp risk-off reversal. The heavyweight metals and mining sub-index, which is inextricably linked to Chinese industrial demand, surged to a record high on Thursday, driven by strong iron ore and copper prices as Chinese buyers returned from their holiday.³⁴ However, these gains were completely reversed on Friday as investors took profits and the price of gold retreated below the key $4,000 per ounce level, dragging mining stocks and the broader index lower.³⁴

New Zealand: Rate Cut Exuberance Wears Thin

The S&P/NZX 50 index also ended the week in the red, posting a 0.4% decline to close at 13,467.26.³⁶ The New Zealand market’s performance provided a textbook case study on the limitations of domestic monetary policy in the face of global headwinds. The week began with a significant domestic catalyst: the Reserve Bank of New Zealand (RBNZ) delivered a surprise 50-basis-point interest rate cut to support its sluggish economy.³⁸ This aggressive move initially worked as intended, sending the NZX 50 to a new record high on Wednesday.³⁶ However, the optimism proved fleeting. The market quickly gave back its gains as the “global malaise”—driven by the US shutdown and Friday’s trade war news—overwhelmed the positive domestic stimulus, demonstrating that for smaller, open economies, local policy cannot insulate markets from a wave of global fear.³⁶

Conclusion and Outlook: Uncertainty Reigns as Earnings Season Looms

The week ending October 10, 2025, marked a pivotal moment where simmering geopolitical risks boiled over, abruptly ending a period of AI-fueled market optimism. A week that began with record highs ended with the worst single-day losses in months, fundamentally resetting investor expectations. The primary takeaway is that the US-China trade conflict has returned as the single most dominant driver of global market sentiment, capable of overriding all other factors.

The market now enters a period of heightened uncertainty, with several key signposts that will determine its direction in the coming weeks:

• Q3 2025 Earnings Season: With the US government shutdown delaying official economic data, the upcoming corporate earnings reports will be scrutinised more intensely than ever. Results from major banks like JPMorgan Chase and Citigroup next week will be particularly crucial.¹ Their forward-looking guidance will serve as the primary source of information on the health of the US economy and the potential impact of tariffs.⁶
• US-China Rhetoric: All eyes will be on the diplomatic channels between Washington and Beijing. Any further escalation in threats or retaliatory actions will likely trigger further market volatility, while any move toward de-escalation could spark a relief rally.
• The Shutdown’s Endgame: The duration of the US shutdown remains a critical variable. A prolonged shutdown risks translating into a tangible economic drag as federal workers miss paychecks, which could impact consumer spending and GDP.³ A swift resolution would remove a key layer of uncertainty for both the market and the Federal Reserve.

Disclaimer

This report is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell any securities. The analysis is based on publicly available information and sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Market conditions are subject to rapid change, and past performance is not indicative of future results. Investors should conduct their own research and consult with a qualified financial professional before making any investment decisions.

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